global insurance market opportunities a scientist’s...
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So how can a scientist’s perspective on flood help the insurance industry better prepare for this risk?
Dr. Petr Puncochar from Aon’s Impact Forecasting team tackles the topic by clarifying some common flood misconceptions between scientists and insurance professionals, explaining the pitfalls and benefits of modeling tools and, most critically, outlining the key opportunities to better understand this risk and build a more resilient future.
1. A flood is never just a flood: understand the basic hazard concepts
2. Don’t be fooled by magnificent maps: pick the right tool to boost
your flood risk understanding
3. Flood insurance buying is in your hands: use knowledge to boost your
customers’ protection
4. Join the model evolution from reinsurance to regulation: don’t
miss out on these strategic tools
5. Climate change and the protection gap are buzz words for a reason:
turn flood threats into opportunities for resilience and growth
Eighth article, October 2018
The risk of flood is prevalent all over the world, having caused almost USD550 billon of global economic damage over the past decade and
leaving a huge impact on society. Although we can never fully protect ourselves from flood, the insurance industry plays a critical role in working with governments, businesses, and families to build resilient communities while underwriting profitability.
Global Insurance Market Opportunities A Scientist’s Guide to Insuring Flood: 5 things you need to know By Dr. Petr Puncochar
About the GIMOSince its launch in September 2015, the Global Insurance Market Opportunities report has quickly become a leading thought leadership study and reference document for the re/insurance industry.
In 2018, we are taking a new approach to its distribution by publishing articles throughout the year under the banner of Global Insurance Market Opportunities, rather than launching the single, compre-hensive report. In so doing, we aim to increase its utilization, bring our ideas to market as fast as possible to support further development with our re/insurance client partners, and make it easier for GIMO readers to digest the wealth of content generated annually.
1. A flood is never just a flood: understand the basic hazard conceptsDespite many classifications of flood one fact remains common: it is a complex peril that takes four key forms – riverine, rainfall flooding, storm surge, and tsunami – which can occur simultaneously in extreme situations. Plus floods are often triggered by other perils such as earthquakes and hurricanes.
Riverine (fluvial) flooding is the most recognized type of flooding following an increased discharge and/or water level. Spatially, riverine flooding can occur both locally and across entire continental basins – such as in Thailand in 2011, which remains the number one economic and insured flood loss in history. Flood models tend to solely focus on riverine flooding, but can be combined with other types, such as pluvial flooding or storm surge.
Rainfall (pluvial, flash) flooding is caused by intensive rainfall, and is usually a short duration, which makes it difficult to predict and strongly limits its mitigation. Its accuracy today is significantly less than modeling the riverine hazard. Pluvial flooding in 2009 killed over 120 people in the normally arid area of Jeddah in Saudi Arabia.
Storm surge is the most common type of coastal flooding that is caused by a combination of low air pressure, water level uplift due to shear wind, high tide, and oscillating waves. Examples include the 1953 Netherlands event, which killed 1,836 people and caused widespread property damage, and the storm-surge caused by Hurricane Sandy, which impacted New York City in 2012.
Tsunami is a major threat to people living on coast with the overwhelming majority resulting from seabed displacement caused by earthquakes or submarine landslides. Recent tsunamis include the Boxing Day Tsunami of December 26, 2004 in the Indian Ocean, and the Tohoku tsunami from Japan in 2011.
So why is understanding this important? Insurers can use flood hazard knowledge to choose the correct tools to evaluate the risk and understand the nuances of the model outputs. Each flood type should be
independently reviewed when setting or
reviewing primary or reinsurance contract
wordings.
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A Scientist’s Guide to Insuring Flood: 5 things you need to know
Economic Loss – Top 10 Flood Events
Month/Year Region Location Economic Loss (Inflated USD Billions)
Jul 2011 APAC Thailand 49.9
Jul 1998 APAC China 46.8
Jun 1993 United States United States 36.4
Jun 1953 APAC Japan 29.9
Jul 2016 APAC China 29.2
Jul 2010 APAC China 28.7
Aug 2002 EMEA Central Europe 27.7
Aug 1995 APAC North Korea 24.6
May 2013 EMEA Central Europe 23.7
Jul 1931 APAC China 23.2
Source: Impact Forecasting
Insured Loss – Top 10 Flood Events
Month/Year Region Location Loss Loss (Inflated USD Billions)
Jul 2011 APAC Thailand 17.2
Jun 2007 EMEA United Kingdom 7.2
Aug 2002 EMEA Central Europe 4.5
May 2016 EMEA Central Europe 4.1
May 2013 EMEA Central Europe 3.8
Aug 2016 United States Southeast, Midwest, Plains
3.6
Jun 2008 United States Midwest, Mississippi Valley
2.9
Dec 2011 APAC Australia 2.8
Aug 2005 EMEA Central / Eastern Europe
2.4
Jun 1993 United States Midwest, Mississippi Valley
2.2
Source: Impact Forecasting
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A Scientist’s Guide to Insuring Flood: 5 things you need to know
Flood frequency
A flood’s return period, or frequency,
represents the likelihood of an event reaching
or exceeding such a threshold within a certain
period of time, with frequency being the
return period’s inverse value.
In re/insurance, one must pay attention to
differentiate between the return period of
flood hazard (most commonly the flow)
reached at one point of the river network, and
the return period of flood loss that assigns the
extremity of the financial cost of a flood event.
Let’s use the example of flooding in Central
Europe that impacts five countries. The
combined return period of loss is assumed to
be around 30 years; however, some observed
flow values in Northern Austria exceeded 1,000
years as the return period of flood hazard is
different at every segment of the river network.
So why is understanding this important? A lot
of misunderstandings have occurred during
discussions between re/insurance experts and
hydrologists, and so there always needs to be
a consensus.
2. Don’t be fooled by magnificent maps: pick the right tool to boost your flood risk understandingDozens of tools, datasets, and solutions exist
that claim their absence will lead to substantial
flood losses or bankruptcy! Finding a toolkit for
effective flood risk management can be tricky
and requires knowledge of key principles,
what exactly certain data represent, and the
limitations. Below is a shortlist to help clarify
the different options when choosing the most
effective tool for a re/insurer’s objectives:
Flood hazard maps are gridded datasets that
show the spatial extent of flooding. These help
to clarify which location/policy is floodable at a
certain return period and by what flood
hazard. Impact Forecasting provides sets of
flood hazard maps with return periods of 1 in
20, 50, 100, 250, 500 and 1,000 years. For
example, insurers can use its Thailand flood
hazard maps to check the 1-in-100-year flood
hazard for every location in Thailand and
adjust premium accordingly.
Probabilistic catastrophe models are
complex tools that quantify portfolio losses on
synthetically generated realistic events.
Traditionally used for reinsurance, the models
have many additional uses, including detailed
single risk assessments by insurers and
simulating losses to understand the broader
economic exposure for organizations such as
governments, non-governmental
organizations, and corporate companies.
Flood risk maps are a product of probabilistic
catastrophe models and show the relative
average annual loss (AAL) in each model grid
cell. Relative AAL indicates the pure premium
which needs to be charged to achieve a
balanced flood portfolio. There needs to be
sets of risk maps for different physical policy
characteristics.
Underwriting platforms support primary
underwriting by overlaying a single policy over
a flood hazard or risk map and accessing the
underlying hazard or risk value. Some platforms
allow accumulation analyses to evaluate
underwriting strategy on an entire portfolio.
Underwriting platforms could exist as a stand-
alone application or as a web-based system.
Loss calculation platforms provide the ability
to run any catastrophe model through Monte-
Carlo simulations and estimate financial loss
based on an entire insured portfolio. Platforms
must be robust enough to apply all possible
insured conditions, provide detailed results, or
analyze modeling uncertainties.
True or false? These maps both claim to show a 1-in-500-year flood hazard map representing riverine flooding in Canada. However, the image on the left is calculated via a simplified methodology and based on crude spatial data so has grossly overestimated the flood risk. The image on the right provides a more credible representation, based on a higher terrain resolution and advanced hydro-dynamic simulations. Through more detailed modeling such as this, inhabitants avoid being charged very high premiums or being refused any insurance protection at all.
Case study: How accurate are these modeling outputs? There can be substantial differences in flood hazard maps for the same location due to
different methods and datasets. People tend to trust outputs of mathematical simulations,
particularly if it is nicely visualized, but these can be misleading and need to be de-mystified.
The accuracy highly depends on the underlying hydrological and spatial data, which
methods were used to model the hazard, and what flood type the output represents.
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A Scientist’s Guide to Insuring Flood: 5 things you need to know
3. Flood insurance buying is in your hands: use knowledge to boost your customers’ protectionThere is a surprising fact: everyone knows
what flooding means, but the results of several
questionnaires (including one example
conducted for the National Flood Insurance
Program) in the U.S., show only a minority of
people know if their insurance covers this peril
and if so, what specific type. This situation has
resulted from a range of contract wordings
that insurers have developed in various
geographies over the years. These often limit
protection to specific and rare types of flood
losses, such as sewage back-up policies in
Canada or extremely low limits in Austria that
rarely cover the costs for a basic clean-up. This
has led to a large difference in flood insurance
penetration in various countries or even
individual regions. For example, in Germany,
Bremen has only 19 percent penetration, but
Baden Wuerttemberg reaches 94 percent.
In many countries, such as the Netherlands and
recently Canada, flood insurance has either not
been available or has been absent for key
occupancy lines, passing substantial risk to
local government. This has changed in Canada
after significant flooding in 2013 which created
opportunities for insurance companies to offer
comprehensive products.
For markets where flood insurance exists,
including Switzerland and France, country-
wide policies still use the flat tariffs regardless
of where the insured risk is located.
Meanwhile, in markets such as Austria,
Australia, Canada, and the U.S., we have seen
more advanced systems providing guidelines
on avoiding the highest risks, and providing an
indication of the flood premium to be charged.
In general, the higher the flood insurance
penetration, the more advanced systems are
applied by insurers to understand and price
the flood risk.
Based on recent serious flood events in Europe
(2002, 2005, 2013), the U.S. (2005, 2012, 2017,
2018), Australia, Japan and Thailand (2011) and
Canada (2013), families, communities, and
companies are increasingly demanding a
holistic weather risk insurance protection.
Now is the right time for the insurance
industry to step-up and start offering this
comprehensive flood cover – without taking
significant additional risk – based on advanced
analytical tools, to increase insurers’
underwriting confidence.
4. Join the model evolution from reinsurance to regulation: don’t miss out on these strategic toolsSince the 1990’s, the use of catastrophe
models has evolved from reinsurance buying
to shaping insurers’ strategies and enterprise
risk management. Due to the ever-increasing
value of modeled results – resulting from more
granular data, advanced technology, and
skilled modelers – these analytics are now
reviewed and assessed by global rating
agencies and regulators of financial markets.
For example, EIOPA’s Solvency II regulation
requires companies to hold solvency capital
to withstand a 1-in-200-year loss, stating:
“The use of catastrophe models can help to
decrease the solvency capital requirement and
provide better flood risk understanding which
can be potentially optimized.”
Similar strategies, often called and judged as
Solvency II equivalents, now exist in multiple
countries, such as Japan, the U.S., Bermuda,
Australia, and many others. From a scientist’s
perspective, it is encouraging to see the
influence of catastrophe models is spreading as
a strategic part of an insurer’s toolkit.
However, the key learning to keep in mind is
where multiple flood (or other catastrophe)
models exist, the user faces an important
decision over which model to select for their
needs, and which best reflects their firm’s own
view of risk. Advanced expertise or model
evaluation is crucial before making any
decisions or ‘blending’ several model outputs
into one exceedance probability curve. Again,
the exact knowledge of model coverage is
essential to make sure all aspects and missing
flood sub-types are handled correctly, and the
purchased protection is effective and reliable.
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A Scientist’s Guide to Insuring Flood: 5 things you need to know
5. Climate change and the protection gap are buzz words for a reason: turn flood threats into opportunities for resilience and growthMitigating the impacts of climate change
The insurance industry, as a key risk transfer
mechanism, can partially manage the negative
effects of climate change by offering products
to increase insurance penetration and build
appetite, while using data and analytics to
better understand the risk.
Rising temperatures and changing spatial and
temporal patterns of rainfall can significantly
alter hydrological cycles and flood regimes
across the globe, although the impacts differ
substantially from region to region. Studies
have shown that the increase of flood
frequency and intensity could be likely in
regions such as Southeast Asia, India, and
Eastern Africa. Increased risk of flash flooding
associated with summer storm rainfall has been
seen across developed countries in North
America and Europe. Rising sea levels also pose
a significant threat for low-lying regions
through enhanced coastal flooding risk.
Jakarta, with its soil subsidence, is fighting
against time to complete a large construction
project to protect the city from increasing
storm surge risk.
Increased flood risk is not necessarily
connected to changes in annual rainfall
amounts, but rather to its distribution
throughout the year. For example, developed
markets such as the U.S. and Europe face a
probable increase in the amount of
precipitation falling during extreme rainfall
events, but on the other hand, prolonged
rainfall deficits are observed and projected.
However, it is always worth noting that global
increases in flood-related insured losses cannot
be attributed solely to climate change. Socio-
economic changes, such as population
increase, economic growth, and in-floodplain
development are among the main drivers of
rising global catastrophe losses.
Flood insurance can locally become less
available or affordable, particularly in the most
exposed regions. The fact that the largest
protection gap now exists in regions most
prone to severe future impacts signifies an
important challenge for various stakeholders,
including local governments. Access to flood
insurance will be determined not only by
changing risk, but also by adaptation measures
and the way in which societies ensure
sustainable socio-economic development.
Bridging the Protection Gap: the role of flood models
Probabilistic catastrophe models and their
underlying data hold key information about
hydrological and flood regimes – therefore
offering analytical tools that could trigger new
insights and product opportunities. This is of
vital importance in many developing countries
with insufficient insurance penetration – and
even in more mature markets such as the U.S.
where we saw a lack of flood insurance after
Hurricane Harvey.
Models will be a key starting point for
governmental schemes and public-private
partnerships to provide reliable and long-term
insurance protection. In addition, with the
increasing popularity of parametric insurance
and insurance linked securities, catastrophe
models are increasingly being used to not only
design the parametric triggers for specific
programmes, but also provide related pricing.
Some final take-aways…• Always remember that flood, as an extreme natural phenomenon, will have modeling limitations, but understanding these will unlock more
meaningful insights.
• There is a plethora of solutions for effective flood loss modeling and quantification but companies that invest in their understanding of each
product’s strengths and limitations – plus how the tools fit into their existing workflows – will benefit from a strategic advantage.
• Even if there is no flood product for your territory, models today can be efficiently developed and tailored to your individual needs to ensure
that you can take a more scientific approach to understanding and mitigating against this risk.
• There is an ongoing trend in the insurance industry to offer a broader, more holistic coverage for homeowners and businesses – but it does
not have to bring additional risk if it is efficiently quantified via modern analytical solutions.
• Flood maps and models have many more uses than often described: keep an open-mind to discover a host of new opportunities where
science can help achieve growth for insurers while building more flood-resilient communities.
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A Scientist’s Guide to Insuring Flood: 5 things you need to know
Notes:
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A Scientist’s Guide to Insuring Flood: 5 things you need to know
Notes:
A Scientist’s Guide to Insuring Flood: 5 things you need to know
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© Aon plc 2018. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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About the Author:Dr. Petr Puncochar is responsible for Impact Forecasting’s international flood model development. Achievements include implementing new workflows and methodologies, delivering flood projects in new territories and building links between academic/technical expertise and re/insurance industry. Additionally, Petr provides general methodological and technical insights on hydrology, open channel hydraulics, geographical information systems and remote sensing systems. Petr has a PhD in hydrology and open-channel hydraulics from the Czech Technical University.